Returns On Capital At Telkom SA SOC (JSE:TKG) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Telkom SA SOC (JSE:TKG), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Telkom SA SOC:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.07 = R3.4b ÷ (R67b - R18b) (Based on the trailing twelve months to September 2022).

Therefore, Telkom SA SOC has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 11%.

Check out our latest analysis for Telkom SA SOC

In the above chart we have measured Telkom SA SOC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Telkom SA SOC here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Telkom SA SOC, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 7.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Telkom SA SOC's ROCE

To conclude, we've found that Telkom SA SOC is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 22% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a separate note, we've found 1 warning sign for Telkom SA SOC you'll probably want to know about.

While Telkom SA SOC may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.